Answers

Of course we didn't test this scenario. Windows Media Services expects to be communicating with an encoder that understands the MS-WMSP protocol that is documented at
http://msdn.microsoft.com/en-us/library/cc251059(v=PROT.10).aspx and the stream must be in an ASF container. This is what Windows Media Encoder and Expression Encoder generate but I suspect that VLC does not.

More than likely VLC creates an HTTP stream that effectively is a download of the video frames. WMS needs to be able to interact with the encoder which the MS-WMSP allows.

Of course we didn't test this scenario. Windows Media Services expects to be communicating with an encoder that understands the MS-WMSP protocol that is documented at
http://msdn.microsoft.com/en-us/library/cc251059(v=PROT.10).aspx and the stream must be in an ASF container. This is what Windows Media Encoder and Expression Encoder generate but I suspect that VLC does not.

More than likely VLC creates an HTTP stream that effectively is a download of the video frames. WMS needs to be able to interact with the encoder which the MS-WMSP allows.

Since my question is basically in line with this discussion, I will append it here. If you feel it warrants a seperate one, please let me know. I am using Axis 1011-W IP network cameras to produce the stream. It is not HTTP, but it does support
RTSP and Multicast. I would rather not use multicast as we need to suport hundreds of cameras, but I do not want to have all transmitting a stream at the same time, but only when requested. I would use the media service to pull a single stream from the camera
and serve it up to multiple clients using RTSP as well. I also have a recording requirement, that is probably out of the scope of this discussion. Is there a way to get the RTSP feed into media services? Maybe using an encoder of some sort. The only encode
I saw was the Expression encoder, but that seem to only support video capture devices on the machine Expression is runing. Any ideas? The cameras do support HTTP, but i get the same error as Usman above.

It's essentially the same answer. Using RTSP or HTTP as a delivery mechanism is part of it, yes, but Windows Media Services requires an ASF stream over the protocol. Expression Encoder cannot use an IP camera as a source unfortunately.
Supporting IP cameras is something we're looking at supporting in some way in the future.

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